All taxes have something called a “deadweight cost”. This is simply economic activity that doesn’t happen because of the simple fact that we’re levying a tax. If we tax the purchase of apples then fewer apples will be purchased. This is entirely divorced, by the way, from any good that might be achieved by how we spend that revenue collected. We also know that different taxes have different deadweight costs. We even have a ranking of them. At the top, with the highest costs for the revenue collected, we’ve transactions taxes like the financial transactions tax under consideration. This is so expensive that it’s a really, really, bad idea to tax in this manner. Then come capital and corporate taxes, then with lower again deadweights incomes taxes, then consumption and then finally repeated taxes on real property, or land value taxation. If we were interested only in efficiency (we’re not, equity is important too) then we would collect as much as we could from a land value tax, then from Pigou and sin taxes (carbon emissions, cigarettes, booze) then general consumption taxes and so on. Perhaps leaving corporates and capital entirely untaxed. And there’s a whole field of study, optimal taxation theory, that suggests that we really should do that and the general prescription is the progressive consumption tax. There’s general agreement that on purely those efficiency grounds this is about the best we can do with a tax system.
Tim Worstall, “Surprisingly Perhaps, State Republicans Are Actually Correct On The Economics Of This”, Forbes, 2015-02-14.
August 2, 2016
QotD: The deadweight costs of different forms of taxation
July 29, 2016
QotD: Prices and taxes
Curiously, as a man of the thirteenth century, I “believe” in the price mechanism. (You know: wheat crop fails, price goes up; too much wheat, price goes down.) As a visitor to the twenty-first, I believe it is no longer working. Nearly one full century into the experiment of unlinking money from things, and linking it to “policy” instead, not one person is left on the whole planet with the fondest idea how our system works.
Some years ago I assembled a little team to study what had gone into the price of a loaf of bread. We had to give up. It was too complicated. Bread was officially “untaxed” in the jurisdiction; yet about the only thing we could establish with any confidence, after looking through the production process, was that more than half the price was cumulative direct and indirect taxes.
David Warren, “Deflationary asides”, Essays in Idleness, 2015-01-27.
July 21, 2016
A Deeper Look at Public Goods
Published on 26 Jun 2015
Description: What do we mean by “nonexcludable” and “nonrival” when talking about public goods? Public goods challenge markets because it’s difficult to charge non-payers and it’s inefficient to exclude anyone — so, how do we produce them? Public goods provide an argument for taxation and government provision. But how do we know which public goods should be provided? In this video we cover the free-rider problem and the forced-rider problem in regards to public goods. We also discuss examples of the four different categories of goods, which will be covered in future videos: private goods, commons resources, club goods, and public goods.
QotD: The economic folly of mercantilism
At the heart of [Trump’s] argument is the belief that selling to countries is good and buying from them is bad, the crude mercantilist fallacy that Adam Smith’s Wealth of Nations debunked in the same year that America embraced the Declaration of Independence. Smith, the brilliant British political economist, argued that unless people start eating gold bullion, the point of wealth is to buy not sell; to consume not produce. If China starts shipping free plasma TVs to America, a few American companies may be thrown out of business, but American consumers will be better off. What’s more, they’ll be able to spend their savings on goods from other companies. The only folks that protectionist policies benefit are crony capitalists who face less competition — the very thing that Trump says he’s fighting.
Shikha Dalmia, “Donald Trump’s free-trade follies”, The Week, 2016-06-30.
July 15, 2016
QotD: The poverty of the past
I would point you to one of the great economic resources of our times. The work of Angus Maddison. Download that database (it’s a simple Excel file). Play around with it. And then think about it.
While you think about it, ponder the point that Brad Delong likes to make (derived in part from Maddison and also from his own work). The one fact of economics that we need to explain is what the heck happened around 1700? Why did living standards flatline, roughly and around about, from the founding of Ur until someone worked out how to use a steam engine? That’s the one supreme puzzle. Now, we think we’ve found a lot of answers, Malthusian growth giving way to Smithian (and possibly, as Deepak Lal puts it, Promethean). We might want to ascribe it to capitalism, to markets, to the welfare state, to a step change in technology: and bits and pieces of all of those have obviously contributed to where we are now. But something the heck happened which was different from everything that preceded it.
And now back to Maddison’s numbers. To explain them a little bit (and this again draws on points I’ve lifted from Delong). They are in constant dollars. So, an adjustment has been made for inflation over the decades and centuries. We can’t say that sure, peoples’ incomes in the past were low but so were prices. These numbers are at modern prices (actually, the prices of 1992 if I recall correctly, so adjust by 20 odd years mentally). They are also PPP adjusted, another version of the same thing. So they really are (trying, this is more of an art than a science at this distance) trying to reflect different prices in different places as well as the inflation adjustment across time.
Finally, they are of GDP per capita. This isn’t the same as the average income, not at all. Some amount of GDP will flow to capital, there will be inequality of distribution and so on. However, the average living standard of a place and time cannot be more than that GDP per capita. And then look at the numbers again. Up until 1600 or so GDP per capita wandered around between $500 a year and $1,000 a year or so. All over the world. Up a bit, down a bit, the central years of the Roman Empire were better when the Romans were civilising my Celtic forbears than when the Saxons were slaughtering my Celtic forbears but no real breakout from that range.
And remember: this is at 1992 prices. We really are saying that people had the standard of living that we would have if we had $500 or $1,000 a year to go spend in a 1992 Walmart. Now go look at 1890s America. That house on the prairies time. We really are saying that the average American in 1890 (less than in fact, that difference between incomes and GDP, distributional effects) was living on $3,900 a year. And no, not at some different price level. All housing, clothing, heating, food, everything, at the prices that we would see in a 1992 Walmart.
That’s poor.
In the year of my birth it was $12,200: better, certainly, but simply nowhere near as good as today.
It really is important to understand this point. The past was unimaginably poor by our current standards. As are parts of ther world today. Or, as the man said, the Good Old Days are right now.
Tim Worstall, “Joni Ernst, Bread Bags And The Poverty Of The Past”, Forbes, 2015-02-02.
July 6, 2016
Public Goods and Asteroid Defense
Published on 26 Jun 2015
While the probability of an asteroid hitting the planet is very low, its effect would be disastrous for all of us. So, who should pay for asteroid protection? A good like asteroid defense — a public good, meaning it’s nonexcludable and nonrival — has some unusual properties that challenge markets. We explore the curious case of public goods in this video and others in this section.
July 1, 2016
Is the end in sight for California’s high speed rail fiasco?
Virginia Postrel says the state’s high speed rail boondoggle may finally run out of chances:
California’s high-speed rail project increasingly looks like an expensive social science experiment to test just how long interest groups can keep money flowing to a doomed endeavor before elected officials finally decide to cancel it. What combination of sweet-sounding scenarios, streamlined mockups, ever-changing and mind-numbing technical detail, and audacious spin will keep the dream alive?
Sold to the public in 2008 as a visionary plan to whisk riders along at 220 miles an hour, making the trip from San Francisco to Los Angeles in a little over two and a half hours, the project promised to attract most of the necessary billions from private investors, to operate without ongoing subsidies and to charge fares low enough to make it competitive with cheap flights. With those assurances, 53.7 percent of voters said yes to a $9.95 billion bond referendum to get the project started. But the assurances were at best wishful thinking, at worst an elaborate con.
The total construction cost estimate has now more than doubled to $68 billion from the original $33 billion, despite trims in the routes planned. The first, easiest-to-build, segment of the system — the “train to nowhere” through a relatively empty stretch of the Central Valley — is running at least four years behind schedule and still hasn’t acquired all the needed land. Predicted ticket prices to travel from LA to the Bay have shot from $50 to more than $80. State funding is running short. Last month’s cap-and-trade auction for greenhouse gases, expected to provide $150 million for the train, yielded a mere $2.5 million. And no investors are lining up to fill the $43 billion construction-budget gap.
June 30, 2016
Do Unions Raise Wages?
Published on 7 Apr 2015
Do unions raise wages for workers as a whole? If not, can unions raise the wages of some workers? The answer is, well, it depends. Unions have the ability to restrict the supply of labor to a job, which can increase wages for some workers. However, unions can also lower wages. For example, work stoppages and strikes supported by unions can slow down economic growth, lowering real wages. To illustrate this, we take a look at what happened to Great Britain’s economy during the 1970’s union strikes.
It’s important to note that unions are not just about wages — they can be helpful in protecting workers from arbitrary abuses and maintaining positive workplace relationships.
Finally, we ask — are there differences between professional associations and unions? How are they similar? Watch to learn more about how unions affect the economy.
June 28, 2016
QotD: The real locavore’s dilemma
Today’s typical environmentalist and locavore fancies that he or she possesses more and better knowledge than is contained in market prices. He or she is mistaken in his or her arrogance. The environmentalist who moralizes in favor of recycling cardboard containers and the locavore who boasts that he helps the environment by paying a few cents more for locally grown cabbages and cantaloupes focus on a small handful of visible aspects of production and distribution – such as the wood-pulp contents of the cardboard container or the fuel used to transport agricultural produces over long distances – and leaps without warrant to the conclusion that sticking that used cardboard containers into recycling bins, or reducing the amount of fuel burned to transport produce, generates net benefits for the environment. But there is simply no way that the recycling champion or the locavore can really know what he thinks he knows.
How much energy is used to recycle cardboard containers compared to the amount of energy used to produce new cardboard containers? What is the environmental impact of the chemicals used to cleanse used cardboard of the residue from its earlier uses so that that cardboard can be recycled for another use? How much fertilizer and energy – and what sorts – does your local small-scale farmer use to grow kale and cucumbers compared to the amounts and sorts used by the more-distant, larger-scale farmer? What is the full environmental impact of using land in suburbs such as Fairfax, VA, and Dobbs Ferry, NY, to grow vegetables for sale a local farmers’ markets compared to the impact of using that land differently?
The above are only a tiny fraction of all the relevant questions that must be asked and answered with reasonable accuracy before anyone can possess enough knowledge to be confident that recycling or ‘buying local’ are in fact good for the environment.
Don Boudreaux, “Quotation of the Day…”, Café Hayek, 2016-06-16.
June 27, 2016
Compensating Differentials
Published on 7 Apr 2015
Firms have an incentive to increase job safety, because then they can lower wages. In this video, we explore this surprising claim in much greater depth. Bear in mind that wages adjust until jobs requiring a similar level of skill have similar compensation practices. Why do riskier jobs often pay more? Why has job safety increased over the years? How does a firm’s profit motive play a role?
June 24, 2016
The Brexit surprise
I had expected a narrow Remain victory in yesterday’s referendum, but had I been eligible to vote, I’d have voted to Leave. The initial reports I saw certainly made it seem as if Remain had squeaked out a narrow victory, but I was delighted to see my hometown voting convincingly to Leave at over 65%. The revolt of Labour voters probably was the deciding factor in the final result … the Tories had been having trouble for years trying to keep their EU skeptic wing quiet for fear they’d decamp to UKIP, but Labour seemed to have their supporters well in hand. Yet Middlesbrough and many other Labour ridings in the North East were the ones who came out most strongly for Brexit.
David Cameron has announced that he’ll be resigning (as is proper, under the circumstances), so it might be former London mayor Boris Johnson who ends up leading the negotiations with the EU. Jeremy Corbyn hasn’t indicated whether he will also resign over the result, but it would be difficult for him to continue to lead Labour after Labour’s voters came down for the Leave side against their own party’s recommendations. At Samizdata, Brian Micklethwait shared some thoughts:
Re the Jo Cox murder. Many Remainers used this horror to imply that voting Leave was like voting in favour of MPs being murdered. (The Remainers who refrained from using this argument were not so audible.) I surmise that (a) some potential Leavers were persuaded, (b) some potential Leavers were angered and caused to vote Leave having only previously been thinking about it, and (c) quite a few continued to move towards Leave for reasons unrelated to the Jo Cox murder, but in silence. When the Cox murder happened, there was a shift towards Leave taking place. I surmise that this continued to flow, but underground, so to speak. Minds continued to move, but people stopped telling the pollsters. But, they’ve told them now.
[…]
Next, I refer honorable readers to these graphs (which I also wrote about in this posting here). These graphs say: (1) that when the government takes charge of something the immediate effects are often quite good, but in the long run less good, and then bad, and then very bad; and (2) that a piece of market liberalisation has the opposite effect, disruptive and unsettling at first, but then better, and in the long run unimaginably better. This explains why people so often vote for the government arrangement, against their long-term interests. Voters often have a short-term problem and are begging for a short-term fix. But these “Alpha Graphs” also explain something else, which is that when voters think that they are choosing between (1) bad now and bad in the future, or (2) bad now and better in the future, they are capable of voting in their long-term interest because long-term interest is all that there is on offer. Once governmentalism, so to speak, gets towards the far end of its graph and things are getting worse, really quite fast, and will go on getting worse no matter what, the decision changes radically. The only question is: Will the bad news ever stop? All of this now seems relevant to the Referendum debate. “Europe” was, for many, bad and getting worse. Brexit will also be bad, but eventually, better. If you think those two things, Brexit wins. And Brexit did win, with the people in a terminally bad way voting for it most heavily, and the people, like these people, who are now getting by or better voting for Remain, because they have something or a lot to lose.
It was assumed by Remainers that every time another London and/or Global Grandee came out for Remain, that helped the Remain cause. But for many, the unhappiness of such persons about the idea of Leave was a Leave feature rather than a Leave bug.
Speaking of London grandees, Eddie Izzard, dressed like a loon on Question Time, did not, I surmise, help the Remain cause. I mean, he really didn’t help. Imagine (as lucky old libertarian me living comfortably in London only can imagine) being staunch Labour but long-term unemployed, in Wigan or some such place. And you see on your TV some London Labour-Luvvie comedian, cross-dressed like a cross between Margaret Thatcher, Victoria Wood and Benny Hill, arguing for Remain. You’d vote Leave just to shove a stick up this thoughtless, frivolous, openly-contemptuous-of-everything-you-believe-in idiot’s arse, no matter how much more unemployed it might make you. (See above about not having anything to lose. If you have nothing left to lose, or if you merely feel this, punitive voting becomes one of your few remaining pleasures. (More Izzard related ruminations by me here.))
Tim Worstall on the economic implications of Brexit now that it’s a reality:
As to the longer term economic impact there’s all sorts of dire predictions of imminent recession. And this really just doesn’t ring true. The last time sterling fell like this, in 1993, it set off Britain’s longest ever peacetime economic boom. A lower exchange rate is generally taken to be stimulatory to an economy. Sure, there’s something called the J-Curve which means that it might not be immediately so (the idea being that it takes time for people to change their trade habits, meaning that higher import prices and lower export ones might take 18 months to work through into the real economy) but it really is the standard economic position that a decline in the exchange rate boosts the domestic economy. That’s why the IMF always recommends it for economies in trouble.
That is, the very thing that people are worrying about, a Brexit induced recession, is dealt with by the very thing that people are worrying about, a decline in the sterling exchange rate. These markets things do in fact work.
As to what happens in the near future in proper economic terms the answer is, well, nothing. Since the last revision of the European Treaty there is a procedure laid out for how a country leaves the EU. And it is that everything remains exactly as it was yesterday for the two years it takes to negotiate what will happen next. The only thing that will be influencing things is uncertainty about how those negotiations will pan out. That uncertainty being something which, again, is rather well dealt with by this current fall in sterling. Make investing in British assets cheap enough and people will continue to do it.
And to that long term. I think the long term effects are going to be, as long as we follow sensible economic policies post-Brexit, beneficial to the UK economy. Partly on the Patrick Minford grounds, that leaving the EU allows us to take that one sensible trade stance, unilateral free trade, which being in the EU prevents us from taking. But more than that I am absolutely convinced that the generally slow growth of the advanced economies is nothing to do with Larry Summers’ secular stagnation. Nothing to do with inadequate demand, with slow technological growth, not Robert Gordon’s analysis. Rather, it is the accretion of regulation of the economy that is responsible. And leaving the EU means that Britain can free itself from much to all of that – if it so desires of course.
This does not mean getting rid of the welfare state, doesn’t mean some laissez faire capitalism red in tooth and claw. Just very much less paper pushing and the asking of bureaucratic permission to do things. Just rather more of that Uber idea, move fast and break things. If you prefer, economic growth depends not so much on people innovating but there being space not controlled by the previous rules for people to innovate into. And recreating that space is something that Brexit will allow us to do.
June 18, 2016
QotD: The origin of the push for a minimum wage
Few policies have origins as ugly as that of the minimum wage. “Progressive” intellectuals in the early 20th century supported the minimum wage because they believed it to be an effective policy detergent to help cleanse the gene pool of ‘undesirables.’ By pricing low-skilled, ‘undesirable’ workers out of jobs, ‘undesirables’ are less likely to successfully pro-create and to immigrate. The fact that the minimum wage, by pricing ‘undesirables’ out of work, thereby artificially raises the incomes of white workers was considered to be an added benefit of this social-engineering device.
The ethics of these early supporters of the minimum wage were despicable. But say this much for these racist, protectionist creeps: they understood economics better than do many people today (including some economists) who believe either that the law of demand is uniquely inoperative in the market for low-skilled workers or that the American market for low-skilled workers is monopsonized.* Each belief is as inexplicable as it is unsupportable.
* And monopsonization of the labor market is only a necessary condition for a minimum wage to not destroy employment opportunities for some workers; it is not a sufficient condition.
Don Boudreaux, “Quotation of the Day…”, Café Hayek, 2016-06-01.
June 8, 2016
WW2: The Resource War – IV: Strategic Bombing – Extra History
Published on 26 Apr 2016
*Sponsored* Hearts of Iron IV comes out on June 6!
A series of missed airstrikes resulting in the death of civilians sparked the no-holds-barred Battle of Britain. Germany launched a Blitz to bomb London into submission, but inadvertantly sparked more resistance and gave British industry a chance to bounce back.
On August 25, 1940, a group of German bomber planes got lost on a night-time mission over England. They wound up dropping bombs not on their industrial target, but on the city of London itself. Winston Churchill ordered a retaliatory strike against Germany, but this time it was the RAF who missed their target and hit civilians. Hitler was convinced this was intentional, so he rescinded his prohibition against targeting civilians. The Luftwaffe organized a massive attack against London, intending to break the British people’s will to fight. The Blitz backfired in several respects. First, it diverted Germany’s attention from strategic targets, which meant they were no longer putting real pressure on the British industrial war efforts. Second, they wound up bringing the British together and strengthening their will to fight on in the names of those who’d been lost to German bombs. Ultimately, the cost in men and material for Germany to wage the Battle of Britain exceeded the cost of damage they inflicted.
June 6, 2016
QotD: What really ended the Great Depression in the United States?
The Great Depression was the worst economic crisis in U.S. history. From 1931 to 1940 unemployment was always in double digits. In April 1939, almost ten years after the crisis began, more than one in five Americans still could not find work.
On the surface, World War II seems to mark the end of the Great Depression. During the war more than 12 million Americans were sent into the military, and a similar number toiled in defense-related jobs. Those war jobs seemingly took care of the 17 million unemployed in 1939. Most historians have therefore cited the massive spending during wartime as the event that ended the Great Depression.
Some economists — especially Robert Higgs […] challenged that conclusion. Let’s be blunt. If the recipe for economic recovery is putting tens of millions of people in defense plants or military marches, then having them make or drop bombs on our enemies overseas, the value of world peace is called into question. In truth, building tanks and feeding soldiers — necessary as it was to winning the war — became a crushing financial burden. We merely traded debt for unemployment. The expense of funding World War II hiked the national debt from $49 billion in 1941 to almost $260 billion in 1945. In other words, the war had only postponed the issue of recovery.
Even President Roosevelt and his New Dealers sensed that war spending was not the ultimate solution; they feared that the Great Depression — with more unemployment than ever — would resume after Hitler and Hirohito surrendered. Yet FDR’s team was blindly wedded to the federal spending that (as I argue in my 2009 book New Deal or Raw Deal?) had perpetuated the Great Depression during the 1930s.
FDR had halted many of his New Deal programs during the war — and he allowed Congress to kill the WPA, the CCC, the NYA, and others — because winning the war came first. In 1944, however, as it became apparent that the Allies would prevail, he and his New Dealers prepared the country for his New Deal revival by promising a second bill of rights. Included in the President’s package of new entitlements was the right to “adequate medical care,” a “decent home,” and a “useful and remunerative job.” These rights (unlike free speech and freedom of religion) imposed obligations on other Americans to pay taxes for eyeglasses, “decent” houses, and “useful” jobs, but FDR believed his second bill of rights was an advance in thinking from what the Founders had conceived.
Burton Folsom, “If FDR’s New Deal Didn’t End the Depression, Then It Was World War II that Did”, The Freeman, 2014-12-26.
